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Today we consider the method for evaluating for gift tax purposes interests in a closely held family partnership. In valuing an interest in a closely-held partnership, a discount for lack of liquidity or marketability which would be generally appropriate may be inappropriate if the valuation is to determine tax owing on a gift of such interest. In establishing the valuation for gift tax purposes, the Internal Revenue Code disregards certain “applicable restrictions” on liquidation in a partnership agreement if the gift is made to a family member. I.R.C. � 2704(b).

In this case involving intra-family gifts of partnership interests, the taxpayers challenge noticed gift tax deficiencies based on the Commissioner’s position that Code � 2704(b) barred them from applying a marketability discount to the values of the interests they transferred. The Tax Court ruled summarily for the taxpayers, holding that the special rule in � 2704(b) did not bar their marketability discounts.

The Commissioner now appeals the Tax Court’s decision, arguing that certain partnership agreement restrictions were “applicable restrictions” on liquidation within the meaning of � 2704(b) and should be disregarded, thus precluding a marketability discount in valuing the gifts. Taxpayers cross appeal the court’s determination that certain transferred interests should be considered partnership interests. Because the undisputed facts lead us to conclude that the restrictions in the partnership agreements were not “applicable restrictions” within the meaning of � 2704(b), we affirm.

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